A share certificate is much like the familiar certificate of deposit (CD) offered by banks. It acts like a traditional savings account in that you deposit money to collect dividends over time. It differs from a traditional savings account, though, because you cannot withdraw or deposit money at will.
Instead, you agree to place your money on deposit for a preset period of time, called the “term length,” during which you may not make withdrawals without a penalty. Because you trust your money with the credit union for a longer period of time, longer term certificates are likely to have much better rates than a traditional savings account.
You can deposit your money for as few as several months or as long as several years, but the longer you keep it on deposit, the better your rate will be (in most instances). Also, this rate is usually locked in, meaning it is not subject to change based upon how well the economy is doing at any given moment. In general, share certificates offer a much higher return than traditional savings deposits, if you’re willing to wait the time it takes to get your money back.
What are the risks involved?
If you decide to withdraw your money earlier than the term you’ve chosen, a penalty typically applies. On average, these will cost you between three and six months of earned dividends. Depending on when you decide to withdraw, this can cost you more than you’ve made in dividends if you deposit in a certificate and then immediately withdraw it.
What insurance do I have against loss?
At a credit union, the National Credit Union Administration (NCUA) will insure your deposits for up to $250,000, similar to FDIC insurance at banks. The insurance works the same way, for the same amount, regardless of who provides it. This insurance for your money happens automatically and requires no action on your part.
What are some different options of certificates I can have?
Though people tend to stick with the traditional certificate option, there are many more to choose from.
- A flex certificate is a traditional certificate that allows you penalty-free withdrawals and/or deposits, depending on the type of account you choose. This is a good account if you think you may need the money before the term is up or if you want to make deposits to it.
- A bump-up certificate allows your rate to rise. This means that, if the institution offers a higher rate after you’ve purchased your certificate of deposit, you can request to change your rate to the higher one. The downside is that they may offer lower initial rates.
- A certificate sold through a brokerage is called (as one might guess) a brokerage certificate of deposit. These are less like traditional CDs or certificates and are more like stocks. These notes can be bought and sold on a secondary market.
Is a certificate right for me?
There are many good reasons why a certificate would be the right choice. Certificates usually have minimum deposit amounts, so be sure you’ve got enough savings to spare that you can lock away a few hundred dollars, at least. If you’ve got trouble with impulse spending, certificates can be a great choice to lock your savings away from yourself. They also make an excellent vehicle for an emergency fund.
Using a technique called “laddering,” you can take advantage of the higher rates offered by longer-term certificates while preserving the flexibility of shorter-term ones. If you’ve got the discipline to keep your money locked in a certificate for its term, you can seriously muscle up your savings.
Stop by or call us to get the details on the certificate account that’s right for you!
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